Desperate rush for the entrance
Thursday, 2 August 2007
Sundeep Tucker
FEW Asian economies offer corporate financiers as big an opportunity as China. In the past five years, it has become a key arena for investment banks, super-keen to advise dynamic companies looking to expand at home and, possibly, abroad.
Johan Leven, head of M&A in Asia for Goldman Sachs, says: "Activity has been driven by regulatory reform, economic growth and the opening up of China following its entry into the WTO." The country's staggered entry into the World Trade Organisation, which concluded in December, has opened fresh areas for overseas investors, including financial services.
The M&A landscape in China has its peculiarities. At present, global investment banks are focused not on inbound deals but advising mainland companies about overseas strategy.
Kalpana Desai, head of M&A Asia Pacific region for Merrill Lynch, says: "Inbound M&A is comparatively harder because most privately owned Chinese companies are growing incredibly fast and do not want to sell out. Many are run by young entrepreneurs who believe they have years in which to develop the business."
While regulatory barriers are slowly coming down in sectors such as chemicals and automotive parts, retailing boasts few national chains. The lack of targets with sufficient scale means that multi-nationals have no short-cut to national prominence through a big acquisition. Instead, they have to grow organically.
China is awash with liquidity and, with $1,300bn in reserves, can afford to be choosy about which foreign investors it allows in and which sectors they can play in.
For instance, five years ago Chinese banks were largely broke, and Beijing permitted foreign investors to spend a combined $20bn to acquire stakes in domestic lenders in return for help to improve risk management.
However, it recently blocked an application by Carlyle Group, the US private equity fund, to buy 8.0 per cent of Chongqing City Commercial Bank.
Insiders say the decision signalled that Beijing now only wants overseas investors from the banking sector, as they are considered better capitalised and offer skills required by mainland lenders.
Ms Desai says: "Outbound M&A could become huge. The size and type of deals we are working on is unprecedented, especially in resources." China is increasingly frustrated at being a price-taker for the resources it needs to sustain its breakneck economic growth. Dealmakers expect iron ore, steel, coal, nickel to feature highly in M&A in the coming months. Mr Leven says: "China has companies with huge capitalisations that have negligible global presence. They see foreign acquisitions as strategically important - helping them to access skills that could drive reform across their whole organisations."
In January, China Mobile, the world's largest mobile operator with 300m subscribers, made its first overseas acquisition, paying $284m to acquire Pakistan's Paktel.
Aside from large state-backed concerns, entrepreneurial companies are also looking overseas. Ms Desai says: "Private companies are likely to be buying global brands and relocating the production to lower cost mainland factories." They will be following in the footsteps of China's Lenovo, which in 2004 stunned the business world when it acquired the personal computing business of IBM.
The body created to manage the country's $300bn of foreign reserves is expected to make a number of overseas investments. Few are expected to make as big an impact as its first: a $3.0bn pre-IPO stake in Black stone, the US private equity fund which listed last month.
Outbound M&A will face challenges. Buying big abroad will spark political problems in countries such as the US. The feeling on all sides is that China remains haunted by the experience of CNOOC, the state backed energy giant, which in June 2005 bid $18.5bn for Unocal of the US, only for the hostile deal to fall apart amid national security concerns in Washington.
But amid the focus on outbound M&A, bankers see many opportunities for inbound deals. David Chin, a managing director of UBS's investment bank, says: "Foreign investors want to buy stakes in lenders, while Chinese banks want to expand with overseas acquisitions."
Foreign investment banks are seeking to acquire stakes in domestic securities firms, and so be able to underwrite and trade local stocks. Goldman Sachs and UBS are the only overseas investment banks to have secured licences to conduct local business - and both are watching the domestic market with interest.
Mr Leven says: "The Chinese M&A market has entered a new stage. Five years ago it was mainly inbound, while outbound activity started to gather pace three years ago. Now, domestic M&A has woken up."
..........................................
— FT Syndication Service
FEW Asian economies offer corporate financiers as big an opportunity as China. In the past five years, it has become a key arena for investment banks, super-keen to advise dynamic companies looking to expand at home and, possibly, abroad.
Johan Leven, head of M&A in Asia for Goldman Sachs, says: "Activity has been driven by regulatory reform, economic growth and the opening up of China following its entry into the WTO." The country's staggered entry into the World Trade Organisation, which concluded in December, has opened fresh areas for overseas investors, including financial services.
The M&A landscape in China has its peculiarities. At present, global investment banks are focused not on inbound deals but advising mainland companies about overseas strategy.
Kalpana Desai, head of M&A Asia Pacific region for Merrill Lynch, says: "Inbound M&A is comparatively harder because most privately owned Chinese companies are growing incredibly fast and do not want to sell out. Many are run by young entrepreneurs who believe they have years in which to develop the business."
While regulatory barriers are slowly coming down in sectors such as chemicals and automotive parts, retailing boasts few national chains. The lack of targets with sufficient scale means that multi-nationals have no short-cut to national prominence through a big acquisition. Instead, they have to grow organically.
China is awash with liquidity and, with $1,300bn in reserves, can afford to be choosy about which foreign investors it allows in and which sectors they can play in.
For instance, five years ago Chinese banks were largely broke, and Beijing permitted foreign investors to spend a combined $20bn to acquire stakes in domestic lenders in return for help to improve risk management.
However, it recently blocked an application by Carlyle Group, the US private equity fund, to buy 8.0 per cent of Chongqing City Commercial Bank.
Insiders say the decision signalled that Beijing now only wants overseas investors from the banking sector, as they are considered better capitalised and offer skills required by mainland lenders.
Ms Desai says: "Outbound M&A could become huge. The size and type of deals we are working on is unprecedented, especially in resources." China is increasingly frustrated at being a price-taker for the resources it needs to sustain its breakneck economic growth. Dealmakers expect iron ore, steel, coal, nickel to feature highly in M&A in the coming months. Mr Leven says: "China has companies with huge capitalisations that have negligible global presence. They see foreign acquisitions as strategically important - helping them to access skills that could drive reform across their whole organisations."
In January, China Mobile, the world's largest mobile operator with 300m subscribers, made its first overseas acquisition, paying $284m to acquire Pakistan's Paktel.
Aside from large state-backed concerns, entrepreneurial companies are also looking overseas. Ms Desai says: "Private companies are likely to be buying global brands and relocating the production to lower cost mainland factories." They will be following in the footsteps of China's Lenovo, which in 2004 stunned the business world when it acquired the personal computing business of IBM.
The body created to manage the country's $300bn of foreign reserves is expected to make a number of overseas investments. Few are expected to make as big an impact as its first: a $3.0bn pre-IPO stake in Black stone, the US private equity fund which listed last month.
Outbound M&A will face challenges. Buying big abroad will spark political problems in countries such as the US. The feeling on all sides is that China remains haunted by the experience of CNOOC, the state backed energy giant, which in June 2005 bid $18.5bn for Unocal of the US, only for the hostile deal to fall apart amid national security concerns in Washington.
But amid the focus on outbound M&A, bankers see many opportunities for inbound deals. David Chin, a managing director of UBS's investment bank, says: "Foreign investors want to buy stakes in lenders, while Chinese banks want to expand with overseas acquisitions."
Foreign investment banks are seeking to acquire stakes in domestic securities firms, and so be able to underwrite and trade local stocks. Goldman Sachs and UBS are the only overseas investment banks to have secured licences to conduct local business - and both are watching the domestic market with interest.
Mr Leven says: "The Chinese M&A market has entered a new stage. Five years ago it was mainly inbound, while outbound activity started to gather pace three years ago. Now, domestic M&A has woken up."
..........................................
— FT Syndication Service